SonoSite Inc.

Business
SonoSite Inc.’s roots stretch back to 1994, when the former Advanced Technology Laboratories Inc. (now ATL Ultrasound, a Philips Medical Systems Co. in Bothell, Wash.) embarked on a project to design and develop a highly portable ultrasound device.

In February 1996, the University of Washington (Bothell) joined ATL, Harris Semiconductor (Melbourne, Fla.) and VLSI Technology (San Jose, Calif.) on the collaboration of hand-held ultrasound technology. Half of the $12.6 million project was supported by matching funds from the U.S. Department of Defense, Advanced Research Projects Agency (DARPA).

At that time, the goal was to create a prototype ultrasound unit for military use on the battlefield or in other natural or man-made disaster situations to diagnose victims of severe trauma.

ATL referred to the fledgling hand-held technology as FirstSight and planned on marketing the first commercial unit to women’s healthcare providers. The soon-to-be, lightweight device utilized ATL’s ASIC (application specific integrated circuits) technology to reduce the size and cost of the system.

In February 1997, ATL formally created an internal Handheld Systems Business unit to lead the development of FirstSight technology. Fifty-one weeks later, in February 1998, ATL announced it would spin off the business into an independent, public company. ATL also would provide a total of $30 million in funding – $18 million of which to come at the time of the spin-off – to help new company off the ground.

By April 1998, SonoSite was trading on the Nasdaq and, one month later, the company received FDA 510(k) premarket clearance for its new hand-held technology.

In March 1999, the FDA granted 510(k) premarket approval for the commercial version of SonoSite’s device, covering 10 clinical applications, including obstetrical, gynecological, abdominal and cardiovascular imaging.

The company launched its first hand-carried device – the SonoSite 180 – in April 1999 and the general application, hand-carried ultrasound unit began shipping last September. Product revenues in the first 14 weeks of deliveries exceeded $10 million.

Last November, SonoSite unveiled its second product – the SonoHeart, the first hand-carried echocardiography system. SonoHeart deliveries began this past March.

For the three years from 1997 through 1999, SonoSite spent $31.1 million on research and development. In its 1999 annual report, the company states that it expects R&D spending this year to increase over 1999, but “at a lower rate than the increase in 1999 compared to 1998.”

With the launch of its new products in 1999, sales and marketing expenses rose more than three-fold to $9.8 million, compared with $3.1 million in 1998.

Traded
SonoSite trades on the Nasdaq under the ticker symbol SONO. As of July 14, the company stock traded in the range of $28 per share.

The stock’s 52-week high, as of July 14, was $37.75 per share; its 52-week low was $16 per share.

In June, three investment firms began following SonoSite’s exploits. Dain Rauscher Inc. (Minneapolis) initiated coverage with a “Buy” rating and a price target of $42 per share. George K. Baum & Co. Inc. (Kansas City, Mo.) also started its coverage with a “Buy” rating and a price target of $40. Adams Harkness & Hill Inc. (Boston) came on board with a rating of “Accumulate” and a target of $40 per share.

Chief Competitors
Until now, SonoSite has been the only choice in the hand-carried ultrasound market. On the horizon, however, are two competitors – Teratech Corp.’s (Burlington, Mass.) Terason division and mysono.com (Seoul).

Like SonoSite, Terason’s technology is born from a DARPA research grant. The division received $6 million.

Terason introduced its Terason 2000 product at last year’s annual meeting of the Radiological Society of North America. The device received FDA 510(k) clearance on Nov. 10, 1999.

The Terason 2000 weighs a mere 10 ounces and plugs into a laptop, palmtop or wearable PC via a FireWire connection. Images are reproduced on the computer screen. The system supports color power, color velocity and spectral Doppler and may be configured for all major ultrasound applications, including cardiology.

The Terason 2000 has a list price of $26,000. The company plans to begin U.S. shipments in September.

mysono.com is a spin-off from 3D ultrasound designer and manufacturer Medison Co. Ltd. (Seoul). The mysono201 hand-held ultrasound device is in its final stage of testing and is expected to be available commercially in the United States by the end of this year, after it debuts in Europe. Both FDA 510(k) clearance and the European CE Mark currently are pending.

mysono.com is taking a somewhat unconventional approach to sales of its mysono201. The company will offer its hand-held ultrasound primarily through its Web site to keep costs to a minimum. The company anticipates a list price of less than $10,000 for the notebook computer-sized unit.

The target markets include clinics and physician offices, as well as academic centers and hospital emergency and delivery rooms. Applications would include general abdomen, ob/gyn, small parts imaging, cardiac and vascular. mysono201 displays 2D black-and-white images in real-time.

Principal Products
SonoSite’s lead product is the SonoSite 180. The compact unit is 7.5 inches wide and 13 inches tall and weighs 5.4 pounds. The unit has a list price in the range of $20,000.

When SonoSite launched SonoSite 180 16 months ago, the world tour began in Beijing and traveled east to the United States and on to Europe before concluding its promotional trek in Japan.

Through the first three quarters of sales, the SonoSite 180 has attracted ob/gyn physicians, interventional and diagnostic radiologists, and emergency medicine and trauma physicians. Some internal medicine physicians in Japan and Europe who use ultrasound more frequently also are purchasing the system.

In November 1999, SonoSite added a second product, the SonoHeart. The first hand-carried echocardiography system – which also weighs 5.4 pounds – is an all-digital device which features 2D for real-time cardiac imaging and PowerMap directional color power Doppler images. Physicians immediately can assess and document chamber size, source of murmurs, wall thickness value regurgitation and heart disease.

SonoSite says the SonoHeart even has drawn interest from cardiologists who do not use echocardiograhy on a frequent basis. The system can be used virtually anywhere in a hospital from the ICU to the CCU.

Shipping of SonoHeart units began this past March.

Both the SonoSite 180 and SonoHeart can be connected to printers, hospital information systems or in-room monitors.

In May, SonoSite introduced a high frequency transducer, the L10-5. The transducer began shipping in July.

SonoSite plans to add to its transducer line later this year, targeting the neonatal area so physicians can take a hand-carried ultrasound device with a high-resolution probe into the neonatal unit and perform head, abdomen and hip scans.

Strengths
As noted, SonoSite has a definite advantage by having the only hand-carried ultrasound unit on the market.

Being first to market also has given SonoSite the advantage of knowing what existing and potential users need from their real life perspective and what marketing and technological opportunities may lie ahead.

Internally, the company has refined its manufacturing process to a point where it can produce its lightweight ultrasound units in volume.

“We are building at a rate of 100 per week with very low defect rates,” says Kevin M. Goodwin, SonoSite’s president and CEO. “It is one thing to field five or 10 prototypes, but it is another thing to figure out how to build these units in volume.”

To accommodate the accelerated growth of the company, SonoSite has increased its workforce to approximately 120 employees, four times as many people as those who were with SonoSite when it split from ATL 28 months ago.

The company has a sales force of approximately 30 people in the U.S. There are no direct sales representatives outside of the U.S., but SonoSite has management people in Europe and Hong Kong and distributorships throughout the world, including a pact with ultrasound and MRI firm Esaote S.p.A. (Genoa, Italy). In Japan, distribution is handled Olympus Optical Co. Ltd. (Tokyo).

SonoSite in May signed an agreement giving ATL the exclusive rights to bundle the SonoSite 180 with sales of ATL’s high-end, cart-based HDI (high definition imaging) ultrasound systems. The pact covers distribution of products to radiology, general imaging, perinatology and ob/gyn markets in the U.S.

The SonoSite 180 contract followed a March agreement which gave ATL exclusive rights to bundle the SonoHeart system with sales of ATL HDI ultrasound systems and cardiac catheterization systems from Philips Medical Systems North America (Shelton, Conn.).

Weaknesses
As a small company, there always is the challenge of synchronizing all the internal parts to make one cohesive unit.

While SonoSite is the only company delivering a hand-carried ultrasound unit, it also is navigating somewhat uncharted waters in creating and exploring a new market that the company itself created.

The company has to overcome healthcare provider skepticism that a unit this size and weight can produce images with as much quality as more expensive cart-based ultrasound systems. SonoSite not only must promote its own product, but also must educate the healthcare community on the technology – to explain its uses, its limitations and how to evaluate the images properly.

In response, SonoSite established S.I.T.E. – the SonoSite Institute for Training and Education. The division provides customers with information and access to a range of training opportunities. S.I.T.E.’s educational programs are designed to help users acquire and interpret images generated by the SonoSite systems.

Outlook
One market fact is for sure. SonoSite knows that it will not compete with the mid-range and high-end cart-based ultrasound manufacturers. SonoSite has created its own unique market.

The worldwide ultrasound market has an estimated value of $2.7 billion to $3 billion. SonoSite estimates that ultrasound models with a cost of less than $50,000 account for approximately $150 million of the global market.

If its early numbers are any indication, the company is off to a fine start in a market thats sales potential remains anyone’s guess.

In the first two quarters since deliveries of its SonoSite 180 began in September 1999, SonoSite shipped $18.2 million worth of product. The company expects to ship $8 to $10 million in the second quarter of 2000 and continue the upward trend for the rest of this year.

“Our goal is to get to $50 million [in sales] this year,” says Goodwin.

As for profitability, financial analysts who follow SonoSite anticipate the company turning positive in the first or second quarter of 2001.

“We are continuing to drive hard to get there,” he adds.

Capital apparently has not been a problem for SonoSite, which raised approximately $65 million last year on the public markets.

On the technology side, SonoSite’s goal is to reduce the size and cost of its devices even further and make the technology more useful for physicians, physician assistants and nurses – especially those healthcare providers who do not use ultrasound on a regular basis – to enhance routine physical exams.

Today, physicians listen to hearts and carotid arteries with stethoscopes. The company believes that in the not-so-distant future its SonoHeart will add greatly to cardiologists’ capabilities to access additional functional information.

SonoSite would not speculate how much smaller or less expensive its devices may become.